Does capital equipment being installed as part of a facility expansion in an Illinois enterprise zone qualify for the Enterprise Zone building materials sales tax exemption?

Plain-English summary

The Illinois Department of Revenue ruled that most of the capital equipment a laundry and linen-leasing company planned to install during a facility expansion qualifies for the Enterprise Zone building materials exemption from Illinois Retailers' Occupation (sales) Tax and Use Tax.

The exemption, found at 35 ILCS 120/5k and 86 Ill. Adm. Code 130.1951, lets a purchaser buy building materials tax-free if the materials will be permanently incorporated into real estate located in an enterprise zone, and the purchaser holds an active Enterprise Zone Building Materials Exemption Certificate at the time of purchase.

The company listed eight categories of equipment for its expansion: wastewater treatment equipment, a 250 HP steam boiler, air compressors, an LED lighting upgrade, a rail system for sorting and cleaning soiled linens, a tunnel washer with water extraction press, a multi-stage dryer system, and a high-speed ironer line. The Department applied its long-standing three-factor "intention test" (is the item affixed to the realty, is it used for the purpose the realty serves, and what was the installer's intent) and found that, based on the taxpayer's description of how each item would be bolted or connected to the building's foundation, walls, or structural steel, all of the equipment -- with one exception -- would qualify.

The exception is the LED lighting. The Department drew a line between the light fixtures (which qualify if permanently affixed to the building) and the light bulbs themselves. If bulbs are already installed in a fixture when it's purchased, the whole fixture purchase is exempt. But if bulbs are purchased separately and later installed into existing fixtures, those bulb purchases do not qualify for the exemption.

What this means for you

Businesses expanding in an enterprise zone

If you're installing capital equipment as part of a construction or remodeling project inside an Illinois enterprise zone, equipment that gets permanently bolted, welded, or otherwise affixed to the building -- and that serves the building's function -- can qualify for the sales/use tax exemption on building materials, even if it doesn't look like a "traditional" building material. But you (or your contractor) still need an active Enterprise Zone Building Materials Exemption Certificate at the time of each purchase; the exemption isn't automatic just because the property sits in a zone.

Contractors and equipment purchasers

Keep documentation of exactly how each piece of equipment will be attached (anchor bolts, foundation mounting, hard-wired utility connections) and why it's essential to the building's use -- that's exactly the kind of detail the Department relied on here. Also watch for split purchases: buying a lighting fixture with bulbs already in it is treated differently from buying bulbs separately to install into an existing fixture.

Accountants and tax professionals

This PLR is a useful data point applying the "intention test" from ST 00-0156 (as cataloged in ST 08-0003-PLR) to modern industrial/commercial equipment (wastewater systems, dryers, ironers) rather than classic building components. Note it is binding only on the requesting taxpayer and only to the extent its stated facts are accurate and complete.

Common questions

Q: What is the Enterprise Zone building materials exemption?
A: Under 35 ILCS 120/5k and 86 Ill. Adm. Code 130.1951, gross receipts from retail sales of materials that will be incorporated -- through remodeling, rehabilitation, or new construction -- into real estate located in an enterprise zone are exempt from Illinois Retailers' Occupation Tax (and the corresponding Use Tax), as long as the sale is a "qualified sale" to a purchaser holding an active Exemption Certificate.

Q: Which items in this ruling qualified?
A: The wastewater treatment equipment, the 250 HP steam boiler, the air compressors, the rail system, the tunnel washer, the dryer system, and the high-speed ironer line all qualified, because each would be permanently affixed to the facility (via anchor bolts, connections to walls/roof/structural steel, or utility hookups) and is essential to the laundry and linen-leasing operation.

Q: Did the LED lighting upgrade qualify?
A: Only partly. Lighting fixtures permanently affixed to the building qualify for the exemption. If the LED bulbs are already installed in the fixture at the time of purchase, that purchase is exempt too. But LED bulbs purchased separately and later installed into fixtures do not qualify.

Q: What is the "intention test" the Department used?
A: A three-factor, fact-specific test from ST 00-0156: (1) whether the item is affixed to the realty, (2) whether it's applied to the use or purpose the realty serves, and (3) the intent of the person affixing it -- with an item's essentiality to the real estate's use as another factor often considered.

Q: Can another business rely on this ruling?
A: No. This is a Private Letter Ruling, binding on the Department only as to the specific taxpayer that requested it, and only to the extent the facts it provided were correct and complete. It expires 10 years from issuance or earlier if the underlying law or facts change.

Citations and references

Statutes and rules:

• 35 ILCS 120/5k (Enterprise Zone building materials exemption from Retailers' Occupation Tax)
• 86 Ill. Adm. Code 130.101 (Retailers' Occupation Tax imposed on retail sales of tangible personal property)
• 86 Ill. Adm. Code 150.101 (Use Tax imposed on tangible personal property purchased at retail)
• 86 Ill. Adm. Code 130.1951(c)(1) (qualified sale requires an active Exemption Certificate at time of purchase)
• 86 Ill. Adm. Code 130.1951(e) (examples of qualifying building materials permanently affixed to realty)
• 2 Ill. Adm. Code 1200.110 (Private Letter Ruling procedure and binding effect)

Related Department guidance:

• ST 08-0003-PLR (April 1, 2008) (cataloging prior letters applying the intention test)
• ST 00-0156 (three-factor intention test for permanent affixation)

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2021.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2021/st21-0007-plr.pdf

Original ruling text

ST-21-0007 09/13/2021 ENTERPRISE ZONES
Under the Enterprise Zone building materials exemption, a deduction from Illinois
Retailers’ Occupation Tax liability exists for gross receipts from retail sales of
materials that will be incorporated, by remodeling, rehabilitation, or new
construction, into real estate located in an enterprise zone established by a
county or municipality under the Illinois Enterprise Zone Act. (See 35 ILCS
120/5k and 86 Ill. Adm. Code 130.1951(e).) (This is a PLR.)

September 13, 2021
Dear NAME:
This letter is in response to your letter dated August 26, 2021, in which you
requested information. The Department issues two types of letter rulings. Private Letter
Rulings (“PLRs”) are issued by the Department in response to specific taxpayer
inquiries concerning the application of a tax statute or rule to a particular fact situation.
A PLR is binding on the Department, but only as to the taxpayer who is the subject of
the request for ruling and only to the extent the facts recited in the PLR are correct and
complete. Persons seeking PLRs must comply with the procedures for PLRs found in
the Department’s regulations at 2 Ill. Adm. Code 1200.110. The purpose of a General
Information Letter (“GIL”) is to direct taxpayers to Department regulations or other
sources of information regarding the topic about which they have inquired. A GIL is not
a statement of Department policy and is not binding on the Department. See 2 Ill. Adm.
Code 1200.120. You may access our website at www.tax.illinois.gov to review
regulations, letter rulings and other types of information relevant to your inquiry.
Review of your request disclosed that all the information described in paragraphs
1 through 8 of Section 1200.110 appears to be contained in your request. This Private
Letter Ruling will bind the Department only with respect to COMPANY, for the issue or
issues presented in this ruling, and is subject to the provisions of subsection (e) of
Section 1200.110 governing expiration of Private Letter Rulings. Issuance of this ruling
is conditioned upon the understanding that neither COMPANY, nor a related taxpayer is
currently under audit or involved in litigation concerning the issues that are the subject
of this ruling request. In your letter you have stated and made inquiry as follows:
To Illinois Department of Revenue Legal Services:
COMPANY respectfully requests a Private Letter Ruling pursuant to 2 Ill.
Admin Code Section 1200.10, regarding the eligibility of certain capital
equipment items for the Building Materials and Sales Tax Exemption.
The expansion project materials in question are to be incorporated into
the realty at the company's facility located in the COUNTY Enterprise
Zone.
General Information:

COMPANY
Page 2
September 13, 2021
The PLR request is not based on alternative plans of proposed
transactions or a hypothetical situation but is based on COMPANY’S
actual planned expansion at its current facility. The company is not
currently under audit, and the issue that is the subject of this PLR
Request is not currently being considered or examined by the Illinois
Department of Revenue. The company is not currently involved in any
litigation which the Department is party.
COMPANY requests that all identifying information included in this
request concerning the location of its property; the company's permits,
financing and communications with other governmental entities; and
the detailed materials (Exhibit A) and facility diagram (exhibit B); be
deleted by the Department from any publicly disseminated version of
the PLR.
Statement of Facts:
COMPANY is planning a $$$$ expansion to its current facility located at
ADDRESS. The company has acquired all the necessary permits to
initiate project, including a building permit from the city of CITY. The
Company is in the final stage of securing the financing to commence
construction. The project will include an expansion to the current
building, along with numerous capital equipment additions that will be
incorporated permanently into the realty, will remain with the realty,
and are essential to the use to which the real estate has been put,
commercial laundry and linen leasing service.
A complete list of the capital equipment to be installed at the facility is
as follows:
A.

TEA Wastewater Equipment

B.

Steam Boiler 250 HP

C.

Air Compressor (2)

D.

Upgrade to all LED lighting

E.

Futurail Rail Systems (soil sort and clean rail)

F.

P73-13 Tunnel Washer (with water extraction press)

G.
Dryer System (dryer loading shuttles (2), transfer drying tumbler
(4), & unloading conveyors

COMPANY
Page 3
September 13, 2021

H.

High Speed Large Piece Ironer Line #2

Each of the above items have been set forth in further detail in Exhibit A
and are critical to the Facility's purpose and land operations. Each item
is intended to be permanently affixed to the real estate, and specifically
placed for the exclusive, permanent, and physical incorporation into the
facility for the purpose of providing a commercial laundry and linen
leasing service.
Additionally, a diagram of the Facility is included in this request as Exhibit
B.
COMPANY is currently negotiating agreements for the purchase of the
items listed in Exhibit A and will delay purchase until after the
Department has responded to this letter.
The Company has been collaborating with the Administrator for the
COUNTY Enterprise Zone and hopes to apply for Exemption
Certificates from the Department for the company and all contractors
making purchases in connection with the aforementioned expansion
project at the facility.
Ruling Requested:
COMPANY requests a ruling by the Department that the materials,
including all listed components listed in paragraphs above, and as
described in detail in Exhibit A, are building materials to be incorporated
into real estate within the meaning of the exemption set forth in 35 ILCS
120/5k (the EZ Exemption).
The company notes and understands that for the EZ exemption to apply,
these items must be purchased in a "qualified sale" by a purchaser who
has been issued an Enterprise Zone Building Materials Exemption
Certificate by the Department, as provided by 35 ILCS 120/5k(a) and (b),
and whose exemption certificate is "active" at the time of the sale.
Thank you for your time and consideration. I look forward to hearing
from you.
DEPARTMENT’S RESPONSE:
The Retailers' Occupation Tax Act imposes a tax upon persons engaged in this
State in the business of selling tangible personal property at retail to purchasers for use

COMPANY
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September 13, 2021
or consumption. See 86 Ill. Adm. Code 130.101. Use Tax is imposed on the privilege
of using, in this State, any kind of tangible personal property that is purchased
anywhere at retail from a retailer. See 86 Ill. Adm. Code 150.101. These taxes
comprise what is commonly known as “sales tax” in Illinois.
A "qualified sale" means a sale of building materials that will be incorporated into
real estate as part of a building project for which an Enterprise Zone Building Materials
Exemption Certificate has been issued to the purchaser by the Department. A
construction contractor or other entity shall not make tax-free purchases unless it has
an active Enterprise Zone Building Materials Exemption Certificate issued by the
Department at the time of the purchase. 86 Ill. Adm. Code 130.1951(c)(1).
The Department’s regulation at 86 Ill. Adm. Code 130.1951(e) provides examples
of qualifying building materials. The enterprise zone exemption includes component
parts of building materials that are permanently affixed to realty. While the examples in
the Department’s regulation reflect more conventional buildings, the fundamental
concept of the building materials exemption is that, to qualify, provided that the other
requirements of the regulation are met, the materials at issue must also be physically
incorporated into real estate.
The Department has invoked the intention test in the context of letter rulings
concerning construction contractors. ST 08-0003-PLR (April 1, 2008) identifies a
number of letters invoking the test. ST 00-0156 sets forth the intention test as follows:
“In determining whether an item is permanently affixed to real estate, a
very fact-specific inquiry must be made regarding whether the item is
intended to remain with the realty. In order to make a finding that the item
is permanently affixed, at least three factors must generally be examined.
First, the item must be affixed to the realty. The item must also be applied
to the use or purpose to which the realty is put. Finally, the intent of the
person affixing the item must be examined. Another factor often
examined is whether the item is essential to the use to which the real
estate has been put.”
The Department has reviewed each of the items identified in the request and
more fully described in Exhibit A. Exhibit A states that each of the items will be
permanently affixed to concrete foundations via anchor bolts, to walls, the roof, or the
building’s structural steel. Many of the items will have natural gas connections,
compressed air connections, intake air ducts, exhaust air ducts, and 480-volt electrical
connections. The Department has reviewed its regulations at 86 Ill. Adm. Code
130.1951, the factors contained in the intention test, and its prior letters issued within
the last 10 years. Based on its review, it is the Department’s determination that the
items would qualify for the building materials exemption in Section 5k of the Retailers’
Occupation Tax Act.

COMPANY
Page 5
September 13, 2021

Item (D) is an upgrade to make all the lighting in the facility LED. Lighting
fixtures permanently affixed to the building qualify for the exemption. If the actual LED
bulbs are installed in the fixture at the time of purchase, the purchase of the fixtures
qualifies for the exemption.
However, LED bulbs purchased separately and
subsequently installed in the fixtures do not qualify for the exemption.
To qualify for the exemption the property must be located within an enterprise
zone and the purchaser must possess an Exemption Certificate at the time the building
materials are purchased.
The factual representations upon which this ruling is based are subject to review
by the Department during the course of any audit, investigation, or hearing and this
ruling shall bind the Department only if the factual representations recited in this ruling
are correct and complete. This Private Letter Ruling is revoked and will cease to bind
the Department 10 years after the date of this letter under the provisions of 2 Ill. Adm.
Code 1200.110(e) or earlier if there is a pertinent change in statutory law, case law,
rules or in the factual representations recited in this ruling.
I hope this information is helpful. If you have further questions related to the
Illinois sales tax laws, please visit our website at www.tax.illinois.gov or contact the
Department’s Taxpayer Information Division at (217) 782-3336.
Very truly yours,
Richard S. Wolters
Chairman, Private Letter Ruling Committee
RSW:rkn